Pro-rata basis Allotment of Share

Pro-rata Allotment of Shares refers to the proportional distribution of shares among applicants when the number of shares applied for exceeds the shares available for issuance, typically in cases of oversubscription. Under this system, each applicant receives shares in proportion to the amount they applied for. For example, if an investor applies for 1,000 shares in an issue that is oversubscribed by 200%, they may receive only 500 shares (i.e., half of their application). Pro-rata allotment ensures a fair and equitable distribution of shares to all applicants.

Reasons of Pro-rata basis Allotment of Shares:

1. Fair Distribution:

Pro-rata allotment ensures a fair and equitable distribution of shares among applicants. When demand exceeds supply, this method allows each applicant to receive shares in proportion to their applications, minimizing feelings of unfairness among investors.

2. Equity Among Investors:

By allotting shares on a pro-rata basis, companies uphold the principle of equity. Each applicant receives an opportunity to invest in proportion to their interest, regardless of the size of their application, thus maintaining investor confidence in the fairness of the process.

3. Mitigation of Oversubscription issues:

In cases where a public offering is oversubscribed, pro-rata allotment provides a structured way to address the excess demand. This method simplifies the allocation process and helps manage investor expectations, as they know they will receive a portion of their requested shares.

4. Transparency:

Pro-rata allotment promotes transparency in the share allocation process. The method is straightforward, and investors can easily understand how many shares they will receive based on their application size, enhancing trust in the company’s operations.

5. Encourages Participation:

Knowing that shares will be allotted fairly encourages more investors to participate in future offerings. This can lead to a more extensive shareholder base, which can be beneficial for companies in terms of stability and market presence.

6. Simplified Accounting:

From an accounting perspective, pro-rata allotment simplifies the share issuance process. Companies can easily calculate the number of shares to be allotted to each applicant based on the total number of shares applied for, streamlining record-keeping and reporting.

7. Reduced Administrative Burden:

By adopting a pro-rata approach, companies can reduce the administrative burden associated with managing oversubscriptions. Instead of handling individual requests and conducting lotteries or other complex allocation methods, a pro-rata system simplifies the process.

8. Legal Compliance:

Pro-rata allotment can help companies comply with regulatory requirements. Many jurisdictions have guidelines regarding fair allotment processes, and adhering to a pro-rata system can help ensure compliance with these rules, minimizing legal risks.

Accounting of Pro-rata basis Allotment of Shares:

Accounting for pro-rata allotment of shares involves recording the applications, allotment, and any refund due to oversubscription.

Example Scenario:

• A company issued 10,000 shares at ₹10 each.
• Applications were received for 15,000 shares, resulting in oversubscription.
• The company refunds 5,000 shares and allots the remaining 10,000 shares on a pro-rata basis.

Accounting Entries for Pro-rata Allotment: